The Coronavirus or Covid-19 virus is spreading faster than we would like… In addition to the obvious impact on public health, we also see that companies are experiencing big difficulties. Up to now, we have heard stories of delayed deliveries, intermission of work, cancelled contracts and last-minute cancelled events. The prime question that arises in these situations: Who will pay for the costs already incurred or what about a compensation? What consequences does the Coronavirus have for the breach of contractual obligations?
Often we hear that the Coronavirus is “a clear case of force majeure” and that compensation for damages is not an issue here. Is this really the case? Don’t shoot the messenger, but the answer is no. Only if a number of strict conditions are met, a company will be able to invoke force majeure. This means everything depends on the specific situation, even in case of Corona.
What is force majeure?
According to Belgian law, force majeure is ‘an insurmountable obstacle to the fulfillment of a commitment’. It has to be about:
- an unforeseen circumstance
- which is beyond the control of the party who is to carry out the contract
- and which renders the fulfillment of the obligation completely impossible.
Jurisprudence and legal doctrine have continued to shape these vague conditions. Unfortunately, opinions vary enormously, with the result that the court’s assessment is often very subjective, hence the grey area. Below we summarize for you the most common and generally accepted points of view.
Condition 1: An unforeseeable situation
The underlying principle of this condition is that the situation was not reasonably foreseeable at the time the agreement was concluded.
In the context of the current crisis, the question arises to what extent a worldwide virus outbreak was reasonably foreseeable when a contract was concluded one, two or more years ago. It seems safe to us to say that no one saw or could see a virus attack coming on this scale, certainly not in otherwise safe Western Europe. So there is little doubt that the current situation is an unforeseeable circumstance. It could be different in other parts of the world. After all, anyone who trades with Africa knows that diseases and viruses are more common there, just think of the Ebola crises that have occurred in the past.
But at what point in the past few weeks did the impact of this crisis become “foreseeable”? Subjectivity trumps, which makes pegging the moment of this an extremely difficult exercise. It seems reasonable to us to assume ‘foreseeability’ in the first week following spring break. Firstly, at that point the virus clearly started to spread in Belgium. Secondly, the economic difficulties that would follow could already be deduced from the situation in China and Italy and from the first predictions. Anyone who concluded an agreement at that time that would require, for example, international travel in the near future, could have foreseen that this might cause difficulties.
Condition 2: Beyond the reasonable control of the affected party
This implies that the occurrence may not be due to the fault or fault of the person who is to provide the service or product.
It is very important to check what the exact cause is for the failure to honor the agreement. For example, a distinction must be made between a government-imposed measure related to the Coronavirus (e.g. ‘no specific goods may be transported by air’) and the shutdown of a factory due to illness of personnel (which can be prevented/avoided by deploying extra personnel) or a preventive shutdown. The question is whether or not the direct cause of non-compliance falls within the definition of force majeure.
The mere existence of the Coronavirus will therefore not be sufficient to invoke force majeure, nor will the fear or uncertainty about the virus be. Likewise, the fact that many people work from home or become ill may not be sufficient as a cause. Everything depends on the context and the specific circumstances. What is possible, however, is that an unexpected travel ban or a sudden closure of all catering establishments constitutes a force majeure situation. Therefore, Corona is certainly not a wild card to simply terminate or even temporarily suspend current agreements.
Condition 3: Absolute impossibility to carry out the commitments
As a result of the unforeseeable situation over which you have no control, there must also be an ‘insurmountable obstacle’.
Generally, it is said that the assessment of this condition must remain reasonable and humane, however, it should still be an actual impossibility. It is therefore insufficient to establish that fulfilling your contractual obligation would require much more effort than anticipated or would be much more expensive. These are typical consequences that are part of your entrepreneurial risk. As long as, for example, you can call in an alternative subcontractor, find another supplier, free up extra staff, etc… regardless of the cost, there is no impossibility that allows you to say that there is force majeure.
Specifically, first of all you must check whether the Coronavirus is a temporary or permanent impediment to your situation. Usually, the force majeure will only be temporary, but Corona may make an agreement completely useless by delaying it (e.g. when delivering flowers for a wedding).
Subsequently, and in connection with the above, it should be examined whether there are reasonable alternatives available to fulfill the obligations after all. For example, is another type of transport possible? Such factors make the difference in assessing whether or not it is a case of force majeure.
On the basis of these two criteria you can assess whether or not there is a temporary or permanent impossibility.
Agreement with a force majeure clause
The above mentioned theory does not excel in clarity. That is why it is important to always include a force majeure clause in contracts. After all, you yourself can determine what does and does not constitute force majeure and what steps should be followed if such an unforeseen situation ever occurs.
Is there an agreement with a force majeure clause? If so, verify the following:
- What are the grounds for force majeure listed in the clause: The ‘Coronavirus’ probably won’t be included literally, but you may have included ‘epidemic’, ‘pandemic’ or ‘disease’ in the list of force majeure situations. Chances are that the court will accept this.
- What wording is used: Should the execution be physically or legally prevented or is a hindrance or delay sufficient? This coincides with the legal ‘impossibility’ condition. With a clause, however, you have the opportunity to clarify its strictness.
- Which conditions or procedure must be followed? Do you have to send a notice of default first? Within what time frame and how? Can you obtain supplies from a third party or not? Do you have to give them one last chance to deliver?
Suppose there is a case of force majeure, what are the consequences?
If you have obligations of your own, but you believe that you cannot meet them due to force majeure, you must inform the other party immediately, together with proof of the force majeure situation. Your agreement may specify how this notification should be done, so be sure to check this. Furthermore, you will also have to limit the damages resulting from this situation as much as possible. This implies, for example, accepting an alternative delivery method or postponing an appointment/deadline.
If you are faced with a contracting party claiming force majeure, respond quickly. A belated (or no) response can be considered as an acceptance of force majeure. When doing so, be sure to check whether all of the conditions are met. The Coronavirus does not in itself constitute a force majeure situation, so the other party will have to cite and prove concrete reasons.
What are the actual consequences of force majeure for the contractual obligations and the costs already incurred? If there is a force majeure clause, first of all check whether the clause states anything about the implications of the force majeure. If there is no clause or it does not mention any implications, then you fall back on the general legal regulation. Here, a distinction is made between the consequences of a temporary and a definitive force majeure situation.
If there is a permanent force majeure situation that makes it completely impossible to perform the agreement, the party invoking force majeure will be released from its obligations. Nor will she be liable for her “contractual breach of contract”. Consequently, she will also be exempt from paying damages. Please note; if the contract can still be partially executed, the execution of this part remains mandatory. This is the case, for example, in the case of a partial delivery.
A temporary situation of force majeure will only give rise to the suspension of the performance of the obligations during the period of force majeure. However, if the agreement loses any meaning as a result, force majeure will still lead to the exemption of the obligations.
If you or your contracting party can invoke force majeure and nothing has been contractually agreed on the assignment of the costs already incurred in the event of force majeure, it is highly likely that the other party (the party in respect of which force majeure is invoked) will have to bear the costs. The party affected by force majeure will in fact be released from any liability for non-performance on the grounds of force majeure.
There are already strong leads pushing the Coronavirus in the direction of an accepted force majeure situation. For example, the China Council for the Promotion of International Trade has identified the Coronavirus as a force majeure for Chinese contracting parties and the World Health Organisation has designated the Coronavirus outbreak as a pandemic (which is generally accepted to be beyond the control of contracting parties).
Nevertheless, it is not possible to give a general opinion on the matter, as everything depends on the specific situation. Its assessment may be influenced by factors such as:
- the presence or absence of force majeure clauses
- at which time the cooperation was entered into
- to what extent the government imposes measures
- the alternatives available
What do you have to do now? First of all, check whether your agreement contains a force majeure clause, contractual penalties or information obligations. Based on this, or in the absence thereof based on the law, make a risk assessment. Indeed, the presence of a force majeure clause does not automatically exempt you from complying with your obligations. Then inform your contracting party and verify whether you are insured to cover any damage on your part.
Last but not least: If you didn’t have a force majeure clause in your agreement, let this be a welcome wake up call to incorporate it in new agreements.